Wealth Transfer Effects of Analysts' Misleading Behavior


  • We are grateful to an anonymous reviewer and Douglas Skinner (Editor) for many helpful suggestions. We also benefited from the helpful comments of Jeff Callen, Ole-Kristian Hope, Artur Hugon, Emad Mohd, Gordon Richardson, Jay Ritter, Kent Womack, and workshop participants at the University of Toronto, 2006 AAA Mid-Year Financial Accounting and Reporting Conference, 2006 CAAA Conference, and 30th Anniversary Conference of the Journal of Banking and Finance. We thank Justin Jin and Veronica Jiang for help in data collection. We acknowledge the financial support of the Rotman School of Management and the University of Toronto. All errors remain our responsibility.


We investigate a sample of 50 firm-events, identified in the Global Research Analysts Settlement, in which analysts were discovered to have acted misleadingly ex post. In this setting, analysts' incentives caused them to issue public disclosures that differed from their private beliefs. We document that these firms' institutional holdings decline significantly during the period in which the analysts issued misleading disclosures. During this period daily small-size trades (a proxy for individual investors) are dominated by buy orders while daily large-size trades (a proxy for institutional investors) are dominated by sell orders. Short interest increases during the event period, consistent with the idea that sophisticated investors are selling. Our estimates of investors' trading losses show that individual investors lost about two and a half times the amount lost by institutions. Overall, the results suggest a wealth transfer from individuals to institutions that is likely attributable to analysts' misleading behavior.